Firm X Arranges Its Pay Such That Workers Are Underpaid

question 36

Multiple Choice

Firm X arranges its pay such that workers are underpaid early in their career but overpaid latter such that workers are, if they stay with the firm, on net better off. A necessary condition for this method of underpayments followed by overpayments to work is that

• A) less motivated workers are more likely to stay with the firm and thus need more incentives to work hard.
• B) workers discount the future with a high interest rate.
• C) this sequencing of pay raises worker productivity.
• D) supervising workers is cheap and effective.

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Definitions:

Accounting Profits

The financial gain calculated by subtracting total explicit costs from total revenues, using generally accepted accounting principles.

Economic Profits

Profits calculated by subtracting both explicit and implicit costs from total revenues; also known as supernormal profits.

Implicit Costs

Costs that represent the opportunity costs of using resources owned by the firm for its own production rather than selling those resources.

Economic Profit

The difference between total revenue and the total cost of inputs (including opportunity costs), reflecting the additional gain from business operations beyond breaking even.